Ch.5 Agg. Demand & Supply Flashcards
4 Major Sources
of Long-term Economic Growth
- Qty/Qlty of Labour Productivity (Human Capital)
- Physical Capital
- Tech change %
- Natural Resources
__ is the Total Amt
that an economy
fully utilizes all resources to prod
& NOT affected by Price
Potential GDP
LAS
Long-run Agg Supp Crv
___ is the Total Qty of G/S prod by ALL Sellers @ diff $
when $ of factors unchanged
Aggregate Supply
AS
$↑ ⇒ profit↑ ⇒ output↑
___ is an EE can buy G/S for given Nom. Wage
& formula
Real Wage
. Nom. Wage
Real Wage=—————-
. Price Level
When $↑ ⇒ Real Wage __
⇒ Producer (boss) Profit __
⇒ Real GDP __
from producer perspective
Real Wage ↓
Producer (boss) Profit ↑
Real GDP ↑
___ is the Total Qty of FINAL G/S that Consumer/ business/ Gov/ Foreigner buy @diff $
Aggregate Demand
AD
=C+G+I+Xₙ
3 Reasons why
AD Crv is
Downward Sloping
1) Real Balance effect
$↑⇒ ppl spend (C) ↓
2) Interest Rate effect
$↑(inflation)⇒ int rate↑⇒ Invest↓
3) Foreign-Trade effect
$↑⇒ export ↓
When Aggr. Qty DD
= Aggr. Qty Supp
Macroeconomic Equilibrium
When Macro-Equilibrium occurs @ LAS, the economy is at ___
when occurs
< LAS = ___
> LAS = ___
Full Employment Equilibrium
Recessionary Gap
2 consec. qtr=RECESSION
Inflationary Gap
output level>Potential GDP
Determinants of AD
3 Changes in Consumtion
1) Indi. Consumer Wealth
2) Age of Consumer Durables
3) Consumer Confidence
Determinants of AD
5 Changes in Investment
1) △ of Interest Rate
2) △ of Capital Goods Costs
3) Capital Goods Age/Capacity
4) Business Expectations
5) Gov Regulations
Determinants of AD
4 Changes in Net Exports
1) X Rate
2) Income Levels Abroad
3) $ of Foreign Goods
4) Tastes of Foreigners
Determinants of AD
3 Changes in Gov
1) Gov Spending
2) Tax Rates
3) Money Supply
Determinants of LAS
4 Changes for Economic Growth
1) Human Capital
2) Capital
3) Tech
4) Natural Resources
The Effect on income of
a △ in autonomous spending
e.g. I, G, X, or autonomous C
When Spending △
Total Income △ more
as some of that income is spent again
The Multiplier
Factor of Prod $ ↓
⇒ Aggr. Supply Crv shifts __
AS shifts →
Inflation is caused by
AD __ or
AS __
AD↑ demand-pull
or AS↓ cost-push
Recession is caused by
AD __ or
AS __
AD↓
or AS↑
Economic Growth
might be the result of
increase in _____
Either AD
or AS
2 Schools of Thoughts
about
whether economy
self-adjust to
economic gap
1) Neoclassical LAS only
a. Economy ADJUSTS the GAP
b. Market is competitive/ efficient
c. $ & Wages adjust rapidly
to surplus/ shortage
∴ Economy always
@Full Employment
2) Keynesian AS –
a. GAP occurs often & lasts long
b. Market is NOT Competitive
∵ Corp. & Unions powers
c. $ & Wages Sticky
∴ Gov Intervention is required
for Full Employment
From Neoclassical view
the Impact of AD ↑
& why
AD ↑
⇒ Price Level ↑
∵ $ & Wages adjust rapidly
⇒ AS = LAS
From Keynesian view
the Impact of AD ↑
& why
AD ↑
⇒ Real GDP ↑
∵ $ Sticky ⇒ horizontal AS
An Recessionary Gap
is closed by
__ Nom. Wage
& __ Price Level
⇒ __ Real GDP
Nom. Wage ↓
Price Level ↓
⇒ Real GDP ↑
An Inflationary Gap
is closed by
__ Nom. Wage
& __ Price Level
⇒ __ Real GDP
Nom. Wage ↑
Price Level ↑
⇒ Real GDP ↓
From Modern View
AS Crv is curved
& the closer to LAS
is closer to ___ view
Neoclassical
Stagflation is caused by
___ + ___
Recession with
↑Inflation + ↑Unemployment
